23 October 2016
US Treasury Secretary Jack Lew said China needs further reform for the renminbi to become a global reserve currency. Photo: Bloomberg
US Treasury Secretary Jack Lew said China needs further reform for the renminbi to become a global reserve currency. Photo: Bloomberg

Renminbi ‘quite a ways’ from reserve currency status: Lew

China’s renminbi is “quite a ways” from becoming a global reserve currency despite its inclusion in the International Monetary Fund’s currency basket, and China needs further reform to reach that goal, US Treasury Secretary Jack Lew said.

On Saturday, China’s national day, the renminbi, also known as the yuan, will join the dollar, euro, yen and British pound in the “special drawing rights” (SDR) basket that forms the IMF’s unit of account.

While recognizing “enormous” change in China in the last 10 years that had made the currency more open, Lew said the country still had work to do on economic reform.

“Being part of the SDR basket at the IMF is quite a ways away from being a global reserve currency,” he said in a conversation with students in Mexico City on Thursday.

“In my dealings with our counterparts in China, I recognize that they have laid out a reform program that would get China where it needs to go, but I pressed them very hard that they need to implement that program to experience the results,” Lew said.

Asked by a student what impact the inclusion of the renminbi in the IMF basket would have on the United States, Lew said the broad use of the US dollar as a world reserve currency was a singular aspect of the US economy, along with the liquidity and depth of its treasury markets.

The yuan’s inclusion in the IMF’s basket of reserve currencies is a validation of the importance of the world’s second-biggest economy and the work policy makers have done to allow freer access to the nation’s markets, Bloomberg says.

But while China is now the biggest trading nation, its currency is barely used in world markets.

Even in the country’s trade with the United States, just 2.4 percent of all payments by value were conducted in yuan.

Still, the yuan’s inclusion in the SDR basket will prompt central banks and fund managers to buy more Chinese assets, with estimates of as much as US$1 trillion of inflows in a five-year period.

Among the main beneficiaries will be the onshore bond market, which have attracted foreign investors since the government accelerated the lowering of barriers in February 2016.

Global funds boosted their holdings of Chinese government debt by the most in two years in June, while the benchmark yield touched a record low in August.

But according to Bloomberg: “One of the basic definitions of a reserve currency is that it must be freely traded. And the yuan is not quite there yet”.

The People’s Bank of China is often suspected of intervening in the market to nudge its exchange rate one way or the other, the financial news provider said.

The central bank also limits the daily onshore movement of the currency to 2 percent on either side of a fixing that it sets.

China also imposes capital controls, which restrict the ability to move money out of the country, although an estimated US$1 trillion has flowed out of the country since September last year in the wake of the yuan’s depreciation and stock market volatility.

The currency’s inclusion in the SDR basket is likely to encourage the government to push ahead with its exchange-rate reforms, as part of its efforts to bolster international usage of the renminbi, Bloomberg said.

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